No wonder China moved to ease monetary policy by trimming its controls on bank lending.
China’s manufacturing contracted slightly in November, according to two closely watched surveys released yesterday.
The news and that of the the six central banks sent shares up on Wednesday, but that rebound quickly ran out puff yesterday with small losses in Europe and the US.
And, although manufacturing in the US improved last month, the performance of the sector in Asia and Europe worsened.
Outside the US, manufacturing activity worsened at the fastest range in almost three years, led by big falls in the UK, Greece, Italy and China.
For the first time on three years, the China Federation of Logistics & Planning’s manufacturing Purchasing Managers’ Index (PMI) fell to 49.0, below the previous month’s 50.4 reading and less than the 50 level that separates contraction from expansion.
And, the HSBC’s China PMI dropped to a 32-month low of 47.7, weaker than its initial "flash" reading of 48.0, and indicating a sharp deterioration of conditions from October’s reading of 51.
The news makes an interest rate cut and further reductions in the reserve ratio very real: a rate cut could come by the end of the year according to some western analysts.
Markets in Asia ignored the weak news from China and focused on the news from Wednesday night of the joint central bank intervention and the easing of monetary policy in China which triggered those big rises in Europe and the US.
"The November PMI final reading points to a sharp deterioration in business conditions across the Chinese manufacturing sector," HSBC’s chief economist for China, Hongbin Qu, said in a statement yesterday.
"Combined with a faster-than-expected easing in inflation, this implies that growth is set to overtake inflation as Beijing’s top policy concern," he said.
The HSBC China Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in more than 420 manufacturing companies.
IHS Global Insights China analyst Alistair Thornton linked the downbeat PMI reading to the central bank’s easing of required reserves for major lenders, saying:
"The message is clear: the economy is slowing much faster than expected and the government has stepped into the ring. The loosening campaign has begun."
The official PMI showed China’s export orders fell sharply.
The CFLP said the sub-index for new orders fell to 47.8 in November from 50.5 in October, while the sub-index for new export orders dipped to 45.6 in November from October’s 48.6.
But the slowdown in economic growth appears to have helped cool price pressures, with the prices sub-index of the official PMI falling to 44.4 from October’s 46.2.
"The November PMI dropped further to below the boom-bust line of 50… indicates that the economic growth pace would continue to moderate in the future," Zhang Liqun, a researcher with the Development Research Centre of the State Council, wrote in the CFLP statement.
China’s economic growth has been slowing all this year as Europe and the US- have slowed to below trend growth (and impending recession in the case of Europe).
China’s central bank cut the reserve requirement ratio for its commercial lenders was seen an attempt as attempt to boost an economy running at its weakest pace since 2009.
The reserve cut, effective December 5, reduces the ratio for the biggest banks to 21% from a record high 21.5%, freeing up more than $UD68 billion for lending to cash-strapped small firms or the still contracting property sector.
China’s annual consumer inflation dipped to 5.5% in October from September’s 6.1% (and July’s three-year peak of 6.5%) and there have been reports on official news websites of a further slowing to less than 5% (annual) last month. That data is due for release next week.
While the timing might have been coincidental with the announcement from the six major central banks of dollar swaps, there are suggestions that it is a sign the country is being drawn more and more into global policymaking.
While slowing this year, China’s quarterly gross domestic product data have so far shown only a mild deceleration, from 9.5% to 9.1% in the third.
Forecasts this week from the OECD put Chinese growth dipping to 8.5% in 2012. It was over 10% in 2011.
Chinese steel production has been falling from mid year and iron ore imports have fallen, both further signs of the growing sluggishness in the Chinese economy.
Thailand and Brazil both cut interests rates late Wednesday and there are signs that India could see a rate trim after its third quarter growth fell below the 7% level for the first time since 2009.
At the same time figures out earlier in the week confirm the Japanese economy is still in recovery mode, but the strength of the rebound is fading, with unemployment up, retail spending weak, industrial production higher and inflation contracting.
India has been one of our fastest growing export markets in recent years and that strength will be challenged by the slowing pace of domestic activity and the sharp fall in the value of the rupee in the past month.
Wednesday’s third quarter report saw annual GDP growth dip to 6.9% and the rupee ended its worst monthly fall for 14 years.
Multiple rate rises to try and control inflation have battered the India
